June 6, 2016
Organizations of all sizes are striving to increase margins these days, which means cutting costs wherever possible to ensure that operations are a little leaner. But when looking at which tasks can be executed outside of the company, there are some that traditionally executives and managers have been reluctant to outsource, even if it streamlines operations and significantly reduces costs.
For example, does it make sense for organizations to outsource critical tasks like research and development (R&D), product innovation and similar in-house jobs to partner organizations? If you choose to, how can you best tackle this?
Spending for R&D generates more than $860 billion in direct and indirect impact nationally according to CNBC. A 2014 study from the Center for European Economic Research shows that the cost savings that come from outsourcing R&D can easily be overshadowed by the added complexities that come from managing the process. For this reason alone, many organizations choose to keep R&D tasks within their company walls.
However, outsourcing R&D, particularly with a global development partner, can extend a company’s capabilities beyond the expected benefits on the balance sheet. Looking beyond your home country’s borders can help you speed up the development of a product when you can’t find enough of the skills domestically, for example. This willingness to look beyond the U.S. for outsourcing talent can not only accelerate your development timelines, it can help your company remain competitive in this global market.
There are several benefits to outsourcing your R&D—and it is critical to any company looking to establish and retain its competitiveness in the market.
Benefits of Outsourcing R&D
For most organizations, R&D is your key differentiator. For a company like Apple, for example, product development might even be your brand. However, the pharmaceutical industry has probably gone the farthest in this area. Although other high-tech industries might be more mature in R&D outsourcing approaches, the pharma/biotech industry has some of the highest levels of outsourcing R&D across high-tech industries. The resulting productivity of R&D in the pharma industry has been well documented.
But outsourcing R&D can provide a great competitive advantage to companies across the board. A single-purpose R&D shop will work with greater focus. An outsourcing partner can offer more expertise for your product development needs that your internal team might not have. A specialty R&D shop will have likely seen more products and had more experience than your in-house team.
Plus, hiring an outsourcing team can be less expensive than hiring a group of full-time experts in house. While savings aren’t what they were when outsourcing began more than 15 years ago, the difference between an expensive local researcher and her equivalent in the outsourcing market is still substantial.
Furthermore, time to market is more and more important these days and increasingly faster paced. An outsourcing team can help you move more quickly and turn products around faster. Outsourcing can also give organizations access to technological and process innovations when you are confronted with size or time constraints that are delaying your ability to establish these competencies in-house.
For example, an increasing amount of medical device companies are outsourcing R&D. They are doing so to reduce time and money expenses, free up resources for other endeavors and reduce financial risk. More recently, product innovation has been a major driver of a company’s gross sales and revenue. To succeed in today’s competitive environment, medical device companies are feeling the pressure to quickly and constantly develop better products and increase their market share, all while controlling costs.
Many companies choose to outsource in order to reduce costs, minimize business risks and speed-up their product’s market entry. The cost reduction could result from improved organizational effectiveness, shorter product development cycles, greater access to high technology, or restructured or improved use of resources. Outsourcing is often beneficial because it allows a company to focus on core proficiencies and reduce the demands on concrete resources. As such, it can be used to redistribute internal resources from dispensable to core activities. This is also helpful in increasing a company’s flexibility in response to changes in the marketplace.
Outsourcing can help a manufacturer meet temporary product development needs rather than make a long-term commitment. It can also be used to pursue multiple projects at once with a limited staff, thus generating a richer product pipeline or a series of products. An outside company will offer diverse skills and likely be faster than your internal team, as they can apply a heightened focus and dedicated resources to the project.
Nevertheless, with all of its potential benefits, outsourcing R&D doesn’t come without its concerns and risks.
Costs and Risks of Outsourcing R&D
Unfortunately, without proper selection and management of an outsourcing partnership, R&D outsourcing can struggle or fail to generate desired outcomes and profits. One of the most common costs of outsourcing R&D can occur when objectives are misaligned. From the onset, you must make sure that the goals of your company and the goals of your chosen design service partner match up. Inconsistent objectives between your internal and external teams will cause problems in your relationship, as well as with your scheduled goals and objectives.
In addition, rivalries can become a concern with your internal team and your outsourcing partner. R&D is of high value and much more threatening to an internal team when it is outsourced than, say quality assurance (QA). You also have to be cautious of cost overruns. Plus, by its nature, R&D is less predictable and less easy to manage than product production or QA.
To outsource product design and then assume that the specifics will take care of themselves is a recipe of disaster. Company leaders must maintain enough project management capability to enforce processes, communicate with all team members and keep track of critical details.
What to Watch Out For When Outsourcing R&D
One thing to watch out for when entering into an outsourced R&D engagement is if the price seems too good to be true, it probably is. Have you put your top choice for an outsourcing partner undergone a rigorous selection process? You need to be sure to pick a compatible partner that will work for your specific project needs. Are they compatible culturally? Is there low turnover? Do they have a solid track record with your technology of choice? These are all questions you should be asking.
Is your outsource partner excited by the prospect of working across time zones and possibly cultures? You should also plan to visit their physical location and spend some time with them on the ground. This will help you get a handle on their processes, products and company culture. You will want to confirm their work experience and what you’ve learned from references on their skills in product development.
But don’t forget to ready your team as well. Are your key players on board? Are they ready to share ownership of new products with the outsourced partner? Are they ready to travel or even live in the offshore location? And are they ready to collaborate with their new team members?
Building a Successful Outsourced Relationship
There are several factors to keep in mind for effective collaboration when working closely with your offshore team. Working with a third party that has a similar corporate culture and values as your own is essential to a productive experience. Lay the groundwork from the beginning and learn where your new partner is located and how they communicate to avoid any culture clash.
In addition, when establishing a good and lasting rapport, invest in building trust in your relationship and strive for ongoing open communication. Effective two-way communication is key. Both parties must be on the same page on every detail regarding your engagement. Be open about your needs and expectations upfront. Managers should be fair and professional, but are encouraged to provide active feedback. They should communicate regularly with everyone involved. And everyone should take responsibility for their own duties and actions at all stages. These are all things to keep in mind when beginning a relationship with your R&D partner.
Go Forth and Research & Develop
When carefully planned and executed, outsourcing of product research and development and innovation can benefit overall company performance. Outsourcing your R&D can trim costs in the short term, deliver products to market faster and boost profits over the long term. There are talented people everywhere; taking advantage of outsourcing your R&D is all about how you manage the process.
Before deciding to outsource, you should be prepared to share key strategies and information with your future partner. The three drivers to an effective outsourcing project are: the right partner, the right relationship and the right culture. You must be careful in choosing the right partner for your company and its specific needs concerning to the project at hand. You want to form a strategic alliance with your chosen partner, they shouldn’t just be a vendor. And lastly, your culture and your partner’s culture must be attuned to R&D, which is a nonlinear process.
While there are still precautions to take when choosing an outsourced R&D partner, you want to make sure your time and money are well spent and the ROI is met. At Accelerance, a global software outsourcing authority, we handle the search process for you and help you find the most qualified development company that’s the best fit for your needs. Our partners have some of the best product design and R&D teams available. We’ve developed a rigorous certification process that helps our clients find and engage with world-class development teams across the globe.
Find out more about the benefits of outsourcing your R&D efforts. Contact us to get the process started.